Principles of Quantitative Development

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Introduction

Purpose-built trading platforms have become indispensable tools for exotic trading in most modern banks. One reason for their success and prevalence is that exotics and structured products business is highly lucrative to a financial institution. One prerequisite for success in exotic business is the ability to price the products. For pricing model development and hedging or risk analysis, the financial institution can resort to its mathematicians and the quantitative models they develop.

Another vitally important prerequisite is the capability to assess and manage the associated risks. The risks arising from market movements are related to pricing and are managed through sensitivity analyses. However, in order to manage credit and operational risks, especially when the business volume grows, banks need robust trading platforms supporting and augmenting the mathematical effort.

A carefully designed and deployed trading platform can easily recuperate its development costs within a few short months of going live, and turn into an important profit centre for banks. Once they started appreciating the necessity and profitability of an in-house trading system, banks and other financial institutions began to invest resources into developing in-house trading systems.

Resource allocation attracts professionals with highly specialized skills to move into the field. However, their skills, at times, work against them. They think of quantitative development as a purely technical ...